Wither the Giants? The Arrogance of Aging Incumbents.

My friend and former colleague Greg Scholl sent me an article this week and a provocative quote jumped out of it. Here is the view of Irwin Gotlieb, CEO of one of the largest global advertising agencies on the planet, as he shared his view on this year’s CES. Given last week’s SOPA/PIPA debate, I thought Mr. Gotlieb’s observations were worth elevating, as they effectively capture a way of thinking that ultimately undermines incumbent media companies and the businesses that serve them:

Much of what we saw at CES relates to things we’ll be seeing 24 months out. In my mind, it’s all good: we’ll be able to target better, we’ll be able to segment better. The ads will be delivered on screens that are sharper, look better, larger, which ultimately provides more effective communication. There’s one last element: in the role that we [media buyers] play, we have a responsibility to ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business, doesn’t destroy the content amortization business, isn’t disruptive simply for the sake of being disruptive.

If it does alter the supply-and-demand equation, it needs to do so positively, not negatively. When you have the share of the deal volume that we do, you can’t just be passive about it. You have to try and influence it. The technologies and devices that begin to get manifested at a trade show like this needs to be guided, so that it all works out in the best interests of our clients.

We have a responsibility to ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business.

A bold statement and, it seems, a common mindset for many incumbent business giants in their respective industries; a mistaken belief that they can somehow coax disrupting forces (be they new companies, or larger macro consumer trends) into conforming to their legacy business models and cost structures. As we have seen countless times, the actions of incumbents when faced with technology disruption often is to turn to litigation, legislation or other non-market strategies (i.e., anti-trust investigations, artificial price barriers) in an attempt to delay or block the challenging technology or companies. This perhaps works as a delaying tactic in the short term (Rio MP3 player case, Napster, book publishing agency pricing model with Amazon) but fails in the long term.

Mr. Gotlieb’s apparent belief that he and other advertising agency leaders can “ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business” is futile in the long run, but perhaps more pernicious is the implicit arrogance of thinking the market force of the Web can be channeled into their bank accounts by sheer force of will. Of the many problems with this way of thinking, paramount is the ability to rationalize away making the hard choices and decisive actions to ensure the GroupMs of the world play a vital role in the new economy as they have done in the legacy one. (Cue Scotty from Star Trek… “You cannot change the laws of physics.”) For GroupM and other incumbents, it’s difficult to fathom, given how entrenched and advantaged they are, that they could drop the ball. But many will, as history has so often shown in times of market transformation.

Technology forces that bring greater efficiency and transparency to markets simply don’t care about privilege, access and rolodexes. They disrupt predecessor markets because of structural problems like price opacity and false scarcity that no longer “work” in the new market. Look at Google: its entire approach to advertising is to remove the middleman — just as, increasingly, the media-buying side of traditional agencies is reliant on the inefficient middleman, marketing up the cost of media to provide their services. Google is now selling $40B of media every year, the majority of it without a middleman (or at least with a different sort of middleman, and in any case, getting far lower margins than in traditional media bought by agencies.)

We watched as the music industry delayed its demise by suing Rio, Napster and literally hundreds of others, delaying the adoption of new business models not based on scarcity. We listen to Jeff Bewkes decry Netflix as the Albanian Army, as he feverishly works to reduce its influence with his content. We observe the movie industry fight with everything it has to protect the windowing strategy and defend limited access to content instead of moving toward open and immediate paid access to their movies. (Fantastic post on this from Rich Greenfield here, “Innovate Don’t Legislate” — registration required.)

And, as a microcosm of this larger conversation, we watched, over a very short period of time in the SOPA/PIPA debate, as the Web demonstrated the disruptive advantages of network effects and scale, as over a period of weeks, legislation that appeared all but ratified was shuttered, up to and including an implied Presidential veto.

Heady stuff. Granted, if we extend the metaphor and use SOPA/PIPA as a microscope, there are extremes on both sides, and it will be messy and require compromise if the big media incumbents and new technology disruptors are to learn how to co-exist. For big media companies and the service businesses that cater to them, this means recognizing the practical realities of changed business models — probably for the most part that their cost of production needs to drop dramatically and they need fundamentally to re-think distribution and customer relationship management to remain profitable and relevant.

On the tech side, it means recognizing that progress requires some level of institutional engagement and political compromise — because like it or not, this is the way our system of government works and how laws get written. This won’t be easy or natural, as it’s anathema to the culture of how new media tech and the start-ups that encompass it conceptualize and operate in our worlds. Facing reality and then demonstrating a bit more collaboration and compromise, however, would go a long way and be better for the customers who, like our democracy, these industries ultimately serve. Because it’s the customers who are in the driver’s seat, and increasingly they know it.

Perhaps it’s pollyanna-ish, but I bet on technology. Big media has the most to lose, because after decades of the game being rigged in its favor, the tables are turning. Of course it’s difficult and painful for media incumbents to embrace digital markets, considering these markets ultimately are smaller and have less attractive economics. That’s presumably why big media executives are so well compensated — if it were easy, anyone could do it. The alternative, however, is to be disrupted by new entrants that don’t have any allegiance to aging business models, and couldn’t care less how out of whack someone else’s cost structure is.

Coming back to Mr. Gotlieb’s view, I offer these thoughts. First, incumbents won’t be able to meaningfully guide the technology juggernaut of more efficient advertising mechanisms, so it’s perhaps better for them to focus their energies and advantages toward thoughtful reinvention. New technologies are bringing actual measurable performance and more efficient means of buying to a large share of advertisers. The challenge for incumbents is to adapt their enterprises to embrace this chaos and profit from it. The good news is, it’s doable. However, to think they can bluster their way out of this disruption is a fool’s errand.

David Pakman has been an internet digital media entrepreneur since 1997. He co-founded the Apple Music Group in 1995, worked at N2K (one of the first online music companies), co-founded MyPlay (pioneer of digital music locker), and was COO/CEO of eMusic for five years. Pakman is now a Partner at Venrock in NYC, investing in early stage internet and digital media companies.

About Voices

Along with original content and posts from across the Dow Jones network, this section of AllThingsD includes Must-Reads From Other Websites — pieces we’ve read, discussions we’ve followed, stuff we like. Six posts from external sites are included here each weekday, but we only run the headlines. We link to the original sites for the rest. These posts are explicitly labeled, so it’s clear that the content comes from other websites, and for clarity’s sake, all outside posts run against a pink background.

We also solicit original full-length posts and accept some unsolicited submissions.

AllThingsD by Writer

AllThingsD.com is a Web site devoted to news, analysis and opinion on technology, the Internet and media. But it is different from other sites in this space. It is a fusion of different media styles, different topics, different formats and different sources. Read more »